1. Capital Adequacy of Banks in India

2. Capital to Risk-Weighted Asset Ratio (CRAR)
The Narasimhan committee endorsed the internationally accepted norms for capital adequacy standards, developed by the Basel Committee on Banking Supervision (BCBS)
BCBS initiated Basel I norms in 1988, considered to be the first move towards risk-weighted capital adequacy norms.

3. Capital to Risk-Weighted Asset Ratio (CRAR)
In 1996 BCBS amended the Basel I norms
In 1999 it initiated a complete revision of the Basel I framework, to be known as Basel II.
In pursuance of the Narasimhan Committee recommendations, India adopted Basel I norms
for commercial banks in 1992
the market risk amendment of Basel I in 1996
the revised norms of Basel II from March 2008

4. Basel I
Basel I is a framework for calculating ‘capital to risk-weighted asset ratio (CRAR).
It defines a bank’s capital as two types:
core (or tier I) capital comprising equity capital and disclosed reserves;
Supplementary (or tier II) capital comprising items such as undisclosed reserves, revaluation reserves, general provisions/general loan loss reserves, hybrid debt capital instruments and subordinated term debt.
Under Basel I, at least 50 per cent of a bank’s capital base should consist of core capital.
In order to calculate CRAR, the bank’s assets should be weighted by five categories of credit risk – 0, 10, 20, 50 and 100 per cent.

5. Basel II
Basel II is a much more comprehensive framework of banking supervision.
It not only deals with CRAR calculation, but has also got provisions for supervisory review and market discipline.
Basel II stands on three pillars:

6. Basel II Pillars Minimum regulatory capital (Pillar 1):
Revised and extensive framework for capital adequacy standards, where CRAR is calculated by incorporating credit, market and operational risks.
Supervisory review (Pillar 2):
Provides key principles for supervisory review, risk management guidance and supervisory transparency and accountability.
Market discipline (Pillar 3):
Encourages market discipline by developing a set of disclosure requirements that will allow market participants to assess key pieces of information on risk exposure, risk assessment process and capital adequacy of a bank.

7. Capital Adequacy Standard in India
In India, there is a ‘three track’ approach for Basel compliance
Commercial banks are Basel I compliant with respect to credit and market risks
Urban cooperative banks maintain capital for credit risk as per Basel I and market risk through surrogate charges
Rural banks have capital adequacy norms that are not on par with the Basel norms

8. Justification of Three Track Approach
Necessity to maintain varying degree of stringency across different types of banks in India reflecting different levels of operational complexity and risk appetite.
Ensure greater financial inclusion
Efficient credit delivery mechanism.

9. Capital Held by Commercial Banks in India (2009 – 2010)
State Bank of Bikaner and Jaipur
Capital adequacy ratio
14.52
13.30
Capital adequacy ratio - Tier I
8.46
8.35
Capital adequacy ratio - Tier II
6.06
4.95
State Bank of Mysore
12.99
12.42
7.15
7.59
5.84
4.83
State Bank of Hyderabad
11.53
14.90
7.14
8.64
4.39
6.26

10. Capital Held by Commercial Banks in India (2009 – 2010)
State Bank of India
Capital adequacy ratio
14.25
13.39
Capital adequacy ratio - Tier I
9.38
9.45
Capital adequacy ratio - Tier II
4.87
3.94
State Bank of Indore
13.46
13.53
7.91
8.58
5.55
4.95
State Bank of Patiala
12.60
13.26
6.94
8.16
5.66
5.10

11. Capital Held by Commercial Banks in India (2009 – 2010)
State Bank of Travancore
Capital adequacy ratio
14.03
13.74
Capital adequacy ratio - Tier I
8.59
9.24
Capital adequacy ratio - Tier II
5.44
4.50

12. Capital Held by National Banks (2009 – 2010)
Allahabad Bank
Capital adequacy ratio
13.11
13.62
Capital adequacy ratio - Tier I
8.01
8.12
Capital adequacy ratio - Tier II
5.10
5.50
Andhra Bank
Capital adequacy ratio
13.22
13.62
Capital adequacy ratio - Tier I
8.67
8.12
Capital adequacy ratio - Tier II
4.55
5.50

13. Capital Held by National Banks (2009 – 2010)
Bank of Baroda
Capital adequacy ratio
14.05
14.36
Capital adequacy ratio - Tier I
8.49
9.20
Capital adequacy ratio - Tier II
5.56
5.16
Bank of India  
Capital adequacy ratio
13.01
12.94
Capital adequacy ratio - Tier I
8.91
8.48
Capital adequacy ratio - Tier II
4.10
4.46
Bank of Maharashtra  
Capital adequacy ratio
12.05
12.78
Capital adequacy ratio - Tier I
6.11
6.41
Capital adequacy ratio - Tier II
5.94
6.37

14. Capital Held by National Banks (2009 – 2010)
Canara Bank
Capital adequacy ratio
14.10
13.43
Capital adequacy ratio - Tier I
8.01
8.54
Capital adequacy ratio - Tier II
6.09
4.89
Central Bank of India
Capital adequacy ratio
13.12
12.23
Capital adequacy ratio - Tier I
6.97
6.83
Capital adequacy ratio - Tier II
6.15
5.40
Corporation Bank 
Capital adequacy ratio
13.61
15.37
Capital adequacy ratio - Tier I
8.90
9.25
Capital adequacy ratio - Tier II
4.71
6.12

15. Capital Held by National Banks (2009 – 2010)
Dena Bank
Capital adequacy ratio
12.07
12.77
Capital adequacy ratio - Tier I
6.76
8.16
Capital adequacy ratio - Tier II
5.31
4.61
Indian Bank
Capital adequacy ratio
13.98
12.71
Capital adequacy ratio - Tier I
11.88
11.13
Capital adequacy ratio - Tier II
2.10
1.58
Indian Overseas Bank
Capital adequacy ratio
13.20
14.78
Capital adequacy ratio - Tier I
7.88
8.67
Capital adequacy ratio - Tier II
5.32
6.11

16. Capital Held by National Banks (2009 – 2010)
Oriental Bank of Commerce
Capital adequacy ratio
12.98
12.54
Capital adequacy ratio - Tier I
9.10
9.28
Capital adequacy ratio - Tier II
3.88
3.26
Punjab and Sind Bank
Capital adequacy ratio
14.35
13.10
Capital adequacy ratio - Tier I
8.44
7.68
Capital adequacy ratio - Tier II
5.91
5.42
Punjab National Bank
Capital adequacy ratio
14.03
14.16
Capital adequacy ratio - Tier I
8.98
9.11
Capital adequacy ratio - Tier II
5.05

17. Capital Held by National Banks (2009 – 2010)
Syndicate Bank
Capital adequacy ratio
12.68
12.70
Capital adequacy ratio - Tier I
7.85
8.24
Capital adequacy ratio - Tier II
4.83
4.46
UCO Bank  
Capital adequacy ratio
11.93
13.21
Capital adequacy ratio - Tier I
6.48
7.05
Capital adequacy ratio - Tier II
5.45
6.16
Union Bank of India
Capital adequacy ratio
13.27
12.51
Capital adequacy ratio - Tier I
8.19
7.91
Capital adequacy ratio - Tier II
5.08
4.60

18. Capital Held by National Banks (2009 – 2010)
United Bank of India
Capital adequacy ratio
13.28
12.80
Capital adequacy ratio - Tier I
7.56
8.16
Capital adequacy ratio - Tier II
5.72
4.64
Vijaya Bank
Capital adequacy ratio
13.15
12.50
Capital adequacy ratio - Tier I
7.74
7.69
Capital adequacy ratio - Tier II
5.41
4.81

19. Capital Held by Old Private Banks (2009 – 2010)
Bank of Rajasthan
Capital adequacy ratio
11.50
7.52
Capital adequacy ratio - Tier I
6.19
3.76
Capital adequacy ratio - Tier II
5.31
Catholic Syrian Bank
Capital adequacy ratio
12.29
10.81
Capital adequacy ratio - Tier I
8.81
8.07
Capital adequacy ratio - Tier II
3.48
2.74

20. Capital Held by Old Private Banks (2009 – 2010)
City Union Bank
Capital adequacy ratio
12.69
13.46
Capital adequacy ratio - Tier I
11.48
12.41
Capital adequacy ratio - Tier II
1.21
1.05
Dhanlaxmi Bank
Capital adequacy ratio
15.38
12.99
Capital adequacy ratio - Tier I
13.75
8.80
Capital adequacy ratio - Tier II
1.63
4.19
Federal Bank
Capital adequacy ratio
20.22
18.36
Capital adequacy ratio - Tier I
18.42
16.92
Capital adequacy ratio - Tier II
1.80
1.44

21. Capital Held by Old Private Banks (2009 – 2010)
ING Vysya Bank
Capital adequacy ratio
11.65
14.91
Capital adequacy ratio - Tier I
6.89
10.11
Capital adequacy ratio - Tier II
4.76
4.80
Jammu & Kashmir Bank
Capital adequacy ratio
14.48
15.89
Capital adequacy ratio - Tier I
13.80
12.79
Capital adequacy ratio - Tier II
0.68
3.10
Karnataka Bank
Capital adequacy ratio
13.48
12.37
Capital adequacy ratio - Tier I
10.60
9.98
Capital adequacy ratio - Tier II
2.88
2.39

22. Capital Held by Old Private Banks (2009 – 2010)
Karur Vysya Bank
Capital adequacy ratio
14.92
14.49
Capital adequacy ratio - Tier I
14.40
12.88
Capital adequacy ratio - Tier II
0.52
1.61
Lakshmi Vilas Bank
Capital adequacy ratio
10.29
14.82
Capital adequacy ratio - Tier I
8.81
12.01
Capital adequacy ratio - Tier II
1.48
2.81
Nainital Bank
Capital adequacy ratio
13.10
15.68
Capital adequacy ratio - Tier I
11.85
14.38
Capital adequacy ratio - Tier II
1.25
1.30

23. Capital Held by Old Private Banks (2009 – 2010)
Ratnakar Bank
Capital adequacy ratio
42.30
34.07
Capital adequacy ratio - Tier I
41.69
33.53
Capital adequacy ratio - Tier II
0.61
0.54
SBI Comm. & Intl. Bank
Capital adequacy ratio
21.24
27.31
Capital adequacy ratio - Tier I
21.49
26.60
Capital adequacy ratio - Tier II
-0.25
0.71
South Indian Bank
Capital adequacy ratio
14.76
15.39
Capital adequacy ratio - Tier I
13.22
12.42
Capital adequacy ratio - Tier II
1.54
2.97

24. Capital Held by Old Private Banks (2009 – 2010)
Tamilnad Mercantile Bank
Capital adequacy ratio
16.05
15.54
Capital adequacy ratio - Tier I
15.33
14.86
Capital adequacy ratio - Tier II
0.72
0.68

25. Capital Held by Private Sector Banks (2009 – 2010)
Axis Bank
Capital adequacy ratio
13.69
15.80
Capital adequacy ratio - Tier I
9.26
11.18
Capital adequacy ratio - Tier II
4.43
4.62
Development Credit Bank
Capital adequacy ratio
13.30
14.85
Capital adequacy ratio - Tier I
11.50
11.93
Capital adequacy ratio - Tier II
1.80
2.92

26. Capital Held by Private Sector Banks (2009 – 2010)
HDFC Bank
Capital adequacy ratio
15.69
17.44
Capital adequacy ratio - Tier I
10.58
13.26
Capital adequacy ratio - Tier II
5.11
4.18
ICICI Bank
Capital adequacy ratio
15.53
19.41
Capital adequacy ratio - Tier I
11.84
13.96
Capital adequacy ratio - Tier II
3.69
5.45
IndusInd Bank
Capital adequacy ratio
12.55
15.33
Capital adequacy ratio - Tier I
7.65
9.65
Capital adequacy ratio - Tier II
4.90
5.68

27. Capital Held by Private Sector Banks (2009 – 2010)
Kotak Mahindra Bank
Capital adequacy ratio
20.01
18.35
Capital adequacy ratio - Tier I
16.13
15.42
Capital adequacy ratio - Tier II
3.88
2.93
Yes Bank
Capital adequacy ratio
16.60
20.60
Capital adequacy ratio - Tier I
9.50
12.90
Capital adequacy ratio - Tier II
7.10
7.70

28. Capital Held by Foreign Banks (2009 – 2010)
AB Bank
Capital adequacy ratio
50.67
30.01
Capital adequacy ratio - Tier I
49.97
29.61
Capital adequacy ratio - Tier II
0.70
0.40
Abu Dhabi Commercial Bank
Capital adequacy ratio
47.57
44.79
Capital adequacy ratio - Tier I
46.67
43.81
Capital adequacy ratio - Tier II
0.90
0.98

29. Capital Held by Foreign Banks (2009 – 2010)
American Express Banking Corp
Capital adequacy ratio
21.34
19.10
Capital adequacy ratio - Tier I
20.09
17.85
Capital adequacy ratio - Tier II
1.25
Antwerp Diamond Bank
Capital adequacy ratio
26.79
33.72
Capital adequacy ratio - Tier I
26.44
33.46
Capital adequacy ratio - Tier II
0.35
0.26
Bank Internasional Indonesia
Capital adequacy ratio
501.34
531.80
Capital adequacy ratio - Tier I
Capital adequacy ratio - Tier II -

30. Capital Held by Foreign Banks (2009 – 2010)
Bank of America
Capital adequacy ratio
12.73
15.49
Capital adequacy ratio - Tier I
11.23
14.97
Capital adequacy ratio - Tier II
1.50
0.52
Bank of Bahrain & Kuwait
Capital adequacy ratio
25.52
25.01
Capital adequacy ratio - Tier I
24.47
24.45
Capital adequacy ratio - Tier II
1.05
0.56
Bank of Ceylon
Capital adequacy ratio
45.18
50.85
Capital adequacy ratio - Tier I
44.11
49.49
Capital adequacy ratio - Tier II
1.07
1.36

31. Capital Held by Foreign Banks (2009 – 2010)
Bank of Nova Scotia
Capital adequacy ratio
12.70
13.15
Capital adequacy ratio - Tier I
9.75
11.03
Capital adequacy ratio - Tier II
2.95
2.12
Bank of Tokyo-Mitsubishi, UFJ
Capital adequacy ratio
29.51
68.16
Capital adequacy ratio - Tier I
28.80
67.40
Capital adequacy ratio - Tier II
0.71
0.76
Barclays Bank
Capital adequacy ratio
17.07
16.99
Capital adequacy ratio - Tier I
16.62
16.47
Capital adequacy ratio - Tier II
0.45
0.52

32. Capital Held by Foreign Banks (2009 – 2010)
BNP Paribas
Capital adequacy ratio
12.37
15.78
Capital adequacy ratio - Tier I
8.38
10.89
Capital adequacy ratio - Tier II
3.99
4.89
Chinatrust Commercial Bank
Capital adequacy ratio
45.40
31.12
Capital adequacy ratio - Tier I
44.75
30.70
Capital adequacy ratio - Tier II
0.65
0.42
Citibank
Capital adequacy ratio
13.23
18.14
Capital adequacy ratio - Tier I
12.42
17.27
Capital adequacy ratio - Tier II
0.81
0.87

33. Capital Held by Foreign Banks (2009 – 2010)
Credit Agricole Bank
Capital adequacy ratio
13.20
19.50
Capital adequacy ratio - Tier I
9.80
14.70
Capital adequacy ratio - Tier II
3.40
4.80
DBS Bank
Capital adequacy ratio
15.70
16.96
Capital adequacy ratio - Tier I
10.27
11.14
Capital adequacy ratio - Tier II
5.43
5.82
Deutsche Bank
Capital adequacy ratio
15.25
16.45
Capital adequacy ratio - Tier I
14.62
15.77
Capital adequacy ratio - Tier II
0.88
0.79

34. Capital Held by Foreign Banks (2009 – 2010)
FirstRand Bank
Capital adequacy ratio
74.73
Capital adequacy ratio - Tier I
74.69
Capital adequacy ratio - Tier II
0.04
HSBC
Capital adequacy ratio
15.31
18.03
Capital adequacy ratio - Tier I
14.12
16.63
Capital adequacy ratio - Tier II
1.19
1.40
J.P.Morgan Chase Bank
Capital adequacy ratio
15.90
23.63
Capital adequacy ratio - Tier I
15.38
22.92
Capital adequacy ratio - Tier II
0.52
0.71

35. Capital Held by Foreign Banks (2009 – 2010)
JSC VTB Bank
Capital adequacy ratio
317.51
225.93
Capital adequacy ratio - Tier I
Capital adequacy ratio - Tier II
Krung Thai Bank
Capital adequacy ratio
81.86
61.02
Capital adequacy ratio - Tier I
80.61
59.77
Capital adequacy ratio - Tier II
1.25
Mashreqbank
Capital adequacy ratio
76.80
78.21
Capital adequacy ratio - Tier I
75.55
76.96
Capital adequacy ratio - Tier II
1.25

36. Capital Held by Foreign Banks (2009 – 2010) Oman International Bank
Mizuho Corporate Bank
Capital adequacy ratio
37.58
38.98
Capital adequacy ratio - Tier I
37.29
38.60
Capital adequacy ratio - Tier II
0.29
0.38
Oman International Bank
Capital adequacy ratio
25.17
41.08
Capital adequacy ratio - Tier I
23.25
39.83
Capital adequacy ratio - Tier II
1.92
1.25
Royal Bank of Scotland
Capital adequacy ratio
12.66
12.50
Capital adequacy ratio - Tier I
7.43
7.94
Capital adequacy ratio - Tier II
5.23
4.56

37. Capital Held by Foreign Banks (2009 – 2010)
Shinhan Bank
Capital adequacy ratio
36.80
40.85
Capital adequacy ratio - Tier I
36.35
39.89
Capital adequacy ratio - Tier II
0.45
0.96
Societe Generale
Capital adequacy ratio
22.47
22.77
Capital adequacy ratio - Tier I
22.08
21.96
Capital adequacy ratio - Tier II
0.39
0.81
Sonali Bank
Capital adequacy ratio
20.31
20.03
Capital adequacy ratio - Tier I
20.10
19.81
Capital adequacy ratio - Tier II
0.21
0.22

38. Capital Held by Foreign Banks (2009 – 2010)
Standard Chartered Bank
Capital adequacy ratio
11.56
12.41
Capital adequacy ratio - Tier I
7.99
8.94
Capital adequacy ratio - Tier II
3.57
3.47
State Bank of Mauritius
Capital adequacy ratio
38.01
34.40
Capital adequacy ratio - Tier I
35.52
31.91
Capital adequacy ratio - Tier II
2.49
UBS AG
Capital adequacy ratio
229.37
157.86
Capital adequacy ratio - Tier I
157.83
Capital adequacy ratio - Tier II
0.03

39. Implementation of Basel II
RBI announced in May 2004 that banks in India should examine the options available under Basel II for revised capital adequacy framework.
In February 2005, RBI issued the first draft guidelines on Basel II implementations in which an initial target date for Basel II compliance was set for March 2007 for all commercial banks, excluding Local Area Banks (LABs) and Regional Rural Banks (RRBs).
Deadline postponed to March 2008 for internationally active banks and March 2009 for domestic commercial banks.

40. Implementation of Basel II
RBI guidelines on Basel II implementation were released on April 27, 2007.
Banks in India will initially adopt standardized approach for credit risk and basic indicator approach for operational risk.
After adequate skills are developed, both by banks and RBI, some banks may be allowed to migrate towards more sophisticated approaches.

41. Implementation of Basel II
Indian banks will be required to maintain a minimum CRAR of 9 per cent on an ongoing basis.
Banks are encouraged to achieve a Tier I CRAR of at least 6 per cent by March 2010.

42. Basel II Issues and Challenges
Linking credit rating to regulatory capital standards may have severe macro-economic implications.
As the sovereign ratings of developing and emerging countries are not as high as the industrialized and the high income countries, this will have an unfavourable effect on the credit flows to developing and emerging economies.

43. Basel II Issues and Challenges
RBI’s scheme provides much less risk weights to exposures to scheduled commercial banks than exposures to other banks/financial institutions.
Extensive data requirement
Implementation of Basel II, particularly the advanced approaches like the IRB for credit risk and AMA for operational risk would require a huge amount of data for model building and validation.
A large number of banks in India lack reliable historical data due to late computerization.
Data on losses due to operational risk are currently non-existent.
Lack of good quality historical data on credit, market and operational risks may make migration towards the more advanced approaches of risk management slow.
Implementation cost:
Basel II will lead to increased level of capital requirements.